Another Franchisor Faces Lawsuit Alleging That Its Franchisees Are Actually Employees

If you follow my blog, you know that one of the issues I've been writing about for a couple of years now is the problem that certain franchisors have faced in being deemed "employers" of their franchisees. The most well-publicized of the "franchisees are really employees" cases is Awuah v. Coverall, a case I blogged about here, here, and here. The trend that has seen franchisees filing lawsuits seeking a determination that they are actually employees of their franchisors has continued to grow.

The case discussed below, Roosevelt Kairy, v. Supershuttle International, Inc., Bus. Franchise Guide (CCH) (N.D. Cal. Sept. 20, 2012), is a good example of what these cases typically look like. The decision I report on does not deal directly with the "franchisees as employees" issue, which will likely be decided upon by an arbitrator (for the reasons discussed below). This decision in particular deals with a challenge by the franchisees to the arbitration clause that was in their respective franchise agreements, which they claimed were unconscionable.

Plaintiffs, individuals who drive passenger vehicles for SuperShuttle, were franchisees of the company. Plaintiffs sued to challenge SuperShuttle's “unlawful misclassification of its airport shuttle drivers as ‘franchisees’ and independent contractors,” alleging that they had not been paid minimum wages and overtime compensation pursuant to the Fair Labor Standards Act (“FLSA”) and under California law.

Each franchisee signed a franchise agreement with SuperShuttle that contained a mandatory arbitration clause.” Most of the franchise agreements also provided that “[a]ny arbitration, suit, action or other legal proceeding shall be conducted and resolved on an individual basis only and not on a class-wide, multiple plaintiff or similar basis.”

Supershuttle moved to compel arbitration and to stay the action pursuant to Section 3 of the Federal Arbitration Act. The only issue was whether the arbitration agreements were valid and enforceable. Plaintiffs made three challenges to arbitrability: (1) that Supershuttle waived arbitration by pursuing litigation; (2) that the arbitration agreements were unconscionable and therefore invalid; and (3) that Plaintiffs should not be compelled to arbitrate their statutory claims.

The Court began its analysis by discussing the Supreme Court’s decision in AT&T v. Concepcion, 563 U.S. __, 131 S. Ct. 1740 (2011). Under Concepcion, the Court stated, agreements to arbitrate may be “invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue.” (quoting Concepcion, 131 S. Ct. at 1742-43.

The Court first considered the waiver argument. In essence, the plaintiffs claimed that SuperShuttle waived its right to enforce arbitration because it did not seek to compel that process after plaintiffs first filed suit (which occurred prior to the ruling in Concepcion). In disposing of that argument, the Court found that it would have been futile for SuperShuttle to attempt to compel arbitration because, prior to Concepcion, California and Ninth Circuit law held that similar arbitration agreements with class action waivers were unconscionable and unenforceable.[1] Because SuperShuttle had no right to waive prior to Concepcion, the Court held that no such waiver occurred. The Court also found that the plaintiffs had not been prejudiced by SuperShuttle’s delay in seeking to compel arbitration.

The Court then turned to plaintiffs’ argument that they should not be compelled to arbitrate their statutory claims. The Court observed the rule that, where statutory claims are involved and an arbitration agreement exists, the agreement should be enforced if the litigant can “effectively vindicate his or her statutory claim for relief in arbitration, unless Congress itself has evinced an intention to preclude waiver of judicial remedies for the statutory rights at issue.” (internal citation omitted). Finding that plaintiffs had not shown any such intention by Congress to preclude arbitration of claims under the FLSA, the Court disposed on plaintiffs’ argument on statutory grounds as well.

Finally, the Court considered plaintiffs’ argument that the arbitration provision was unconscionable. To demonstrate procedural unconscionability, the plaintiffs claimed that the arbitration provision was “hidden in a prolix of printed matter,” and that SuperShuttle had failed to provide them with copies of the AAA’s commercial arbitration rules before the plaintiffs signed the franchise agreement. The Court found that there was no procedural unconscionability because the plaintiffs: (1) were given franchise disclosure documents that described the arbitration provisions; (2) had a fourteen-day period to review the franchise agreements and disclosure documents; and (3) were given copies of the franchise agreement with a table of contents that clearly identified the arbitration provision.

Interestingly, the Court did agree with plaintiffs that the fee-splitting provisions (providing that the parties would equally share the arbitrator’s fees and costs) were substantively unconscionable. In this regard, the Court observed that “fee splitting can be unconscionable where fees and costs are so prohibitively expensive as to deter arbitration” and that the Court should consider “whether the arbitral forum in a particular case is an adequate and accessible substitute to litigation.” The Court reasoned that, based on the plaintiffs’ cost projections, it appeared that the individual plaintiffs would not be able to afford arbitration. Instead of refusing to enforce the arbitration provision, however, the Court severed the fee-splitting provisions of the arbitration agreements as unenforceable.